Please help with Alternative 2

Questions 7, 8, 9

Thank you

The Great Tamale Best friends, Nathan and Cody, decided to start their own business which would bring authentic Mexican food to their local communities. Together they have started the Great Tamale, a food cart. Nathan is the chef, having spent considerable time studying Mexican cuisine abroad. Cody takes the orders and manages the business operations. Thanks to an appearance on the Food Network, the Great Tamale food cart has experienced a phenomenal first year. In its first year of operations the company sold 31,125 plates of food and had the below sales and cost figures. Sales Variable costs Contribution margin Fixed costs Income before taxes Income taxes (32% rate) Net income $217,875.00 46,687.50 171,187.50 90,000.00 81,187.50 25,980.00 $ 55,207.50 The best friends worked tirelessly in their first year of operations and know that another challenging and competitive year lies ahead of them. Now entering their second year of operations, they are considering two alternatives and have hired your consulting group, known for its inventive business and accounting consulting work, to help them make some important business decisions. The Great Tamale Alternative 1- Food Truck After experiencing such great success with their food cart, Nathan and Cody are considering purchasing a food truck to serve other communities. This would allow the Great Tamale, GT, to reach even more customers in different geographic locations. There would be an increase in the selling price per plate. There will also be an increase in the fixed costs of $30,000 for advertising to inform the public of this change (this amount is already included below under Food Truck data). The financial information is presented below for this alternative as well as the original data. Assume 31,125 plates are sold for the food cart and 45,625 plates are sold for the food truck. Sales Variable costs Contribution margin Fixed costs Income before taxes Income taxes (32% rate) Net income Food Cart Food Truck $ 217,875.00 $365,000.00 46,687.50 103,437.50 171,187.50 261,562.50 90,000.00 147,500.00 81,187.50 114,062.50 25,980.00 36,500.00 $ 55,207.50 $ 77,562.50 Required: 1.) Compute the company's contribution margin under both scenarios, if GT decides MacBook Air Page 10 of 12 Required: 1.) Compute the company's contribution margin under both scenarios, if GT decides to remain a regular food cart and if they decide to become a food truck. Compute the contribution margin both in total dollars and per unit. 2.) Compute the company's contribution margin ratio under both scenarios. (Note: Do not round the CMR for accurate calculations in the following questions). 3 ACCT 102 Group Project 3.) Compute the break-even point in sales dollars under each scenario. How many plates will need to be sold under each situation to break-even? 4.) Compute the operating leverage under each scenario. What does this figure mean? Why is it important to management? Alternative 1 Requirements (continued) 5.) If the company wishes each scenario, food cart and food truck, to generate net income (after-tax) of $170,000, what is the amount of sales that needs to be generated? How many plates will then need to be sold? Prepare a contribution margin statement for this step and verify that your after-tax net income in fact equals $170,000 for both the food cart and food truck. 6.) Assume that the company expects sales to decline by 20% next year. There will be no change in plate price. Prepare forecasted financial results for next year following the format of the contribution margin income statement as shown above with columns for each of the two types (assume a 32% tax rate, and that any loss before taxes yields a 32% tax savings). 7.) Assume that the company expects sales to increase by 20% next year. There will be no change in plate price. Prepare forecasted financial results for next year following the format of the contribution margin income statement as shown above with columns for each of the two types (assume 32% tax rate, and that any loss before taxes yields a 32% tax savings). 8.) If sales greatly increase, which type (food cart or truck) would experience a greater increase in profit? What if sales declined -which product would experience a greater loss or reduction in income? Explain why. How does your calculation from (4) support your point? 9.) Thinking about sales, is there any day of the week or time of day when greater sales are expected? Which type is more sensitive to this occurrence? Which type is less sensitive to this occurrence? Which type is more advantageous and why? Is there anything else the company can do to manage the decline in sales that come with certain days and times? The Great Tamale Alternative 2 - Restaurant Nathan and Cody notice there is stiff competition in the food cart and food truck industries and therefore are considering opening a traditional restaurant Opening a restaurant would have many advantages and disadvantages, the company can expect fixed costs to increase by $140,000 a year to cover rent, equipment, furniture, salaries and other costs. This alternative is exclusive of alternative 1-so use the original financial information from page 1 (also shown below) to calculate the effects of opening a restaurant Sales Variable costs Contribution margin Fixed costs Income before taxes Income taxes (32% rate) Net income $217,875.00 46,687.50 171,187.50 90,000.00 81,187.50 25,980.00 $ 55,207.50 Additional Information: This alternative would allow GT to increase their plate prices to $14.50 and would increase the variable cost per unit by $2,50. Assume plate sales remain at 31,125. 1) Compute the company's new contribution margin under this alternative. Compute Additional Information: This alternative would allow GT to increase their plate prices to $14.50 and would increase the variable cost per unit by $2.50. Assume plate sales remain at 31,125. 1.) Compute the company's new contribution margin under this alternative. Compute the contribution margin both in total dollars and per unit. 2.) Compute the company's contribution margin ratio under both scenarios. (Note: Do not round the CMR for accurate calculations in the following questions). 7 ACCT 102 Group Project 3.) Compute the break-even point in sales dollars under each scenario. How many plates will need to be sold under each situation to break-even? 4.) Compute the operating leverage under each scenario. What does this figure mean? Why is it important to management? Alternative 2 Requirements (continued) 5.) If the company wishes each scenario, food cart and restaurant, to generate net income (after-tax) of $170,000, what is the amount of sales that needs to be generated? How many plates will then need to be sold? Prepare a contribution margin statement for this step and verify that your after-tax net income in fact equals $170,000 for both the food cart and restaurant 6.) Assume that the company expects sales to decline by 20% next year. There will be no change in plate price. Prepare forecasted financial results for next year following the format of the contribution margin income statement as shown above with columns for each of the two types (assume a 32% tax rate, and that any loss before taxes yields a 32% tax savings). 7) Assume that the company expects sales to increase by 20% next year. There will be no change in plate price. Prepare forecasted financial results for next year following the format of the contribution margin income statement as shown above with columns for each of the two types (assume 32% tax rate, and that any loss before taxes yields a 32% tax savings) 8.) Identify at least two advantages and disadvantages of having a brick-and-mortar restaurant versus a food truck. 9.) Thinking about sales, is there any day of the week or time of day when greater sales are expected? Which type is more sensitive to this occurrence? Which type is less sensitive to this occurrence? Which type is more advantageous and why? Is there anything else the company can do to manage the decline in sales that come with certain days and times